Kerala State Industrial Development Corporation Ltd. Vs Commissioner of Income Tax

Arijit Pasayat, C.J.@mdashAccepting the prayer made in terms of Section 256(1) of the Income Tax Act, 1961 (in short, "the Act"), the Income Tax Appellate Tribunal, Cochin Bench (in short, "the Tribunal"), has referred the following questions for the opinion of this court :

"(1) Whether, on the facts and circumstances of the case, on account of incorporation of Section 145 of the Income Tax Act, 1961, with effect from October 1, 1991, in Section 21 of the Interest-tax Act, 1974, and the overriding effect of Section 21 over Section 5, by which the interest-tax has to be levied only on the interest income computed, based on the method of accounting regularly employed by the assessee, the Appellate Tribunal was correct in law in concluding that the Assessing Officer has rightly made the computation of the interest on accrual basis, rejecting the cash system of accounting accepted for the assessment under the Income Tax Act, 1961 ?

(2) Whether, on the facts and circumstances of the case, on account of doctrine of incorporation, Section 145 of the Income Tax Act, 1961, having been incorporated in Section 21 of the Interest-tax Act, 1974, when the assessee maintains books of account on cash system and being assessed under the cash system under the Income Tax Act does not the chargeable interest deserve to be computed on cash method and if the intention of the Legislature would have been to tax on mercantile system, the Legislature in their wisdom would not have included Section 145 of the Income Tax Act, 1961, in Section 21 of the Interest-tax Act ?

2. A short but interesting question arises for consideration. The reference has its foundation in Sections 5 and 21 of the Interest-tax Act, 1974 (in short "the Interest Act"), in the background of Section 145 of the Act. The assessee is, a Corporation controlled by the State Government. Its main object is to aid and finance industrial projects. A return for the year 1993-94 was filed on December 16, 1993. Subsequently, a revised return was filed on August 18,1994, declaring the total income as "nil". In response to a notice u/s 142(1) of the Act, the assessee produced records. It followed the mercantile system of accounting for interest payments, and cash system of accounting for interest receipts. The Assessing Officer was of the view that such a procedure cannot be adopted. Referring to Section 145 of the Act, it was observed that if the method employed by the assessee is such that income cannot properly be deduced therefrom, then the computation can be made upon such basis and in such manner as the Assessing Officer may determine. Referring to the method of accounting adopted by the assessee, it was observed that a true and correct picture of the income earned cannot be found. Accordingly, on the basis of the accounts produced, taxable income was worked out and tax was levied. According to the Assessing Officer, Section 5 of the Interest Act made the position clear so far as chargeability of interest income is concerned on accrual basis and, therefore, income was to be assessed accordingly. The matter was carried in appeal by the assessee before the Commissioner of Income Tax (Appeals) (in short, "the CIT(A)"). The assessee''s stand was that u/s 21 of the Interest Act, the provisions of Section 145 of the Act shall apply in respect of proceedings under the Interest Act, and hence, the Assessing Officer ought to have accepted the assessee''s computation of chargeable interest in view of the fact that the assessee was accounting interest on cash basis. Though he granted relief on certain other aspects, the Commissioner of Income Tax (Appeals) upheld the view of the Assessing Officer about the applicability of Section 5 of the Interest Act. The Revenue as well as the assessee filed appeals before the Tribunal. While the assessee''s appeal related to the applicability of Section 5 of the Interest Act, in the background of Section 145 of the Act, the Revenue filed appeal in respect of relief granted by the first appellate authority. The Tribunal upheld the conclusions of the Assessing Officer and the first appellate authority so far as the assessee''s appeal is concerned. Accepting the assessee''s prayer for reference, the questions, as set out above, have been referred for opinion.

3. Learned counsel for the assessee submitted that Section 21 of the Interest Act has great relevance and on account of inclusion of Section 145 of the Act with effect from October 1, 1991, in the said Section. Interest-tax can be levied on the interest income as computed on the basis of the method of computation and accounting regularly employed by the assessee. By way of elaboration, it is submitted that Section 145 of the Act has been incorporated in Section 21 of the Interest Act and since the assessee maintains books of account in cash system and he has to be assessed under the said system, the method adopted by the Revenue is erroneous.

4. Learned counsel for the Revenue, on the other hand, submitted that the scope of "chargeable interest" is provided in Section 5, which clearly says that subject to the provisions of the Interest Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking accruing or arising to the credit institution in that previous year. Therefore, there is a basic difference between Section 5 of the Act and Section 5 of the Interest Act. The chargeable interest of any previous year under the Interest Act shall be the total amount of interest which has accrued or arisen in the concerned previous year.

5. In order to appreciate the rival submissions, it is necessary to take note of Section 5 of the Act and Sections 4 and 5 of the Interest Act, which read thus :

"5. Scope of total income.--(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which--

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or

(c) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which--

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.-- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this Section by reason only of the fact that it is taken into account in a balance-sheet prepared in India.

Explanation 2.--For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to ,be received by him in India."

6. Sections 4 and 5 of the Interest Act read as follows :

"4. Charge of tax.--(1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing'' on or after the 1st day of April, 1975, a tax (in this Act referred to as interest-tax) in respect of its chargeable interest of the previous year at the rate of seven per cent, of such chargeable interest :

Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983, shall be three and a half per cent, of such chargeable interest.

(2) Notwithstanding anything contained in Sub-section (i) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1st day of April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent., of such chargeable interest.

5. Scope of chargeable interest.--Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking) accruing or arising to the credit institution in that previous year :

Provided that any interest in relation to categories of bad or doubtful debts referred to in Section 43D of the Income Tax Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its profit and loss account for that year or, as the case may be, in which it is actually received by the credit institution, whichever is earlier."

7. Section 4 of the Interest Act is the charging Section providing for levy of tax on "chargeable interest". Section 5 of the said Act, as indicated above, relates to scope of chargeable interest. Levy of tax is on the chargeable interest and it refers to the expression "accruing or arising ... in that previous year". Section 2(7) of the said Act defines "interest". Section 5 of the Act, on the other hand, deals with "scope of total income". Clause (a) of Sub-section (1) of Section 5 refers to "income received or deemed to be received in the previous year". Clause (b) refers to "income which accrues, or arises or is deemed to accrue or arise during the previous year". Clause (c) refers to "income which accrues or arises outside India". The basic difference is that while Section 5 of the Act specifically refers to income received or deemed to be received in one of the clauses of Section 5 of the Interest Act does not refer to any receipt and it specifically refers to interest accruing or arising. It is somewhat similar contextually to Clause (b) of Section5(1) of the Act.

8. The difference was illuminatively stated by the apex court in Commissioner of Income Tax, Gujarat Vs. Ashokbhai Chimanbhai, It was observed that the two words "accrue" and "arise" are used to contradistinguish the word "receive". Income is said to be received when it reaches the assessee ; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. In COMMISSIONER OF Income Tax, BOMBAY Vs. AHMEDBHAI UMARBHAI and CO., BOMBAY., , it was observed by the apex court that it can be said without hesitation that the words "accrue" and "arise" though not defined in the Act are certainly synonymous and are used in the sense of bringing in as a natural result. Strictly speaking, the word "accrue" is not synonymous with "arise". The former connoting the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is a distinction in the dictionary meaning of these words, but throughout the Act they seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate when applied to a particular case. The Oxford English Dictionary defines "accrue" as "to fall as a natural growth or increment ; to come ... as an accession or advantage". It defines "arise" as "to spring up, come into existence". In Royers Pyatt Shellac and Co. v. Secretary of State for India 19241 1 ITC 363, it was observed that perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry L.J. in Colquhoun v. Brooks [1888] 21 QBD 52, that both the words are used in contra-distinction to the word "receive" and indicate a right to receive. It may be taken that all the three expressions, i.e., "accrue", "arise" and "receive", would not have been used unless it was thought that they exhibited some variation in meaning and that a case might possibly arise which would come under one only of the three. If on a question as to the exact meaning of "accruing", it were to be suggested that this only means "received", this can hardly be accepted as correct, even though the difficulty of distinguishing between "accruing" and "arising", as indicated above, may be great. In this sense, perhaps not a very important sense, the expressions are antithetical. But it is very plain that there is here no question of a complete disjunction or of the presentation of three mutually exclusive qualifications. It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income, There must be a debt owed to him by somebody. There must be as is otherwise expressed "debitum in praesenti, solvendum in future" (see W. S. Try Ltd. v. Johnson (Inspector of Taxes) [1946] 1 All ER 532 and Webb v. Stenton [1883] 11 QBD 518). The legal position is that a liability depending upon a contingency is not a debt in praesenti or in future till the contingency happens. But if it is a debt the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount : debitum in praesenti, solvendum in future (see Commissioner of Income Tax, Bombay, City II Vs. Goverdhan Ltd., The postponement of the date of payment does not affect the accrual of the income. The fact that the amount of income is not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt may, in appropriate cases, be a valid ground for claiming'' deductions (see Morvi Industries Ltd. Vs. Commissioner of Income Tax (Central) Calcutta, ).

9. The question is what would be the effect of Section 21 of the Interest Act on Sections 4 and 5. Section 21 provides that certain sections and schedules of the Act and the Income Tax (Certificate Proceedings) Rules shall apply with necessary modifications to the Interest Act. One of these sections is Section 145 of the Act. Earlier this section was not included. But, with effect from October 1, 1991, it was included in Section 21. Sub-section (1) of Section 145 of the Act provides that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. The assessee''s emphasis is on the computation of income in accordance with the method of accounting regularly employed by it. This submission overlooks an important aspect which is laid down in the proviso to Sub-section (1) of Section 145 of the Act. It states that in any case where the accounts are correct and complete but the method employed is such that in the opinion of the Assessing Officer the income cannot properly be deduced therefrom, computation shall be made upon such basis and in such manner as the Assessing Officer may determine. "Chargeable interest" is defined in Section 5 of the Interest Act. As indicated and analysed above, it refers to accruing and arising of interest. Therefore, the Assessing Officer can, by applying Section 5 of the Interest Act, in the background of the proviso to Sub-section (1) of Section 145 of the Act, compute income on accrual basis. The statute must be read as a whole and one provision thereof should be construed with reference to another provision, so as to make a consistent enactment of the whole statute. It is a rule now firmly established that the intention of the Legislature must be found by reading the statute as a whole (see Philips India Ltd. Vs. Labour Court, Madras and Others, ). This rule is referred to as an "elementary rule" by Viscount Simonds (in Attorney-General v. H.R.H. Prince Ernest Augustus of Hanover [1957] 1 All ER 49), a "compelling rule" by Lord Somervell of Harrow (in the aforesaid case). The apex court in Poppatlal Shah Vs. The State of Madras, , held it to be a "settled rule". Lord Halsbury in Charles Robert Leader v. George F. Duffey [1888] 13 AC 294, observed that you must look at the whole instrument inasmuch as there may be inaccuracy and inconsistency, and one must, if it can be done ascertain what is the meaning of the instrument taken as a whole in order to give effect, if possible to do so, to the intention of the framer of it. The view of Lord Somervell in Attorney-General v. H. R. H. Prince Ernest Augustus''s case [1957] 1 All ER, has full application to the facts of the present case. It was observed that a question of construction arises when one side submits that a particular provision of the Act covers the facts of the case and other submits that it does not or it may be agreed it applies, but the difference arises to its application. The title and general scope of the Act constitute the background of the contest.

10. If the interpretation suggested by learned counsel for the assessee is accepted, the very charging section would be rendered inoperative and ineffective, which is impossible to be done. The machinery provisions cannot be interpreted in such a way as to restrict the scope of the charging section. As a matter of fact, the courts are expected to construe the machinery provisions in such a manner that a charge to tax is not defeated (see Associated Cement Company Limited Vs. Commercial Tax Officer, Kota and Others, ).

11. The conclusions of the Tribunal are in order. The first question, there fore, is answered in the affirmative, in favour of the Revenue and against the assessee. In view of this answer, the second question, which is really of academic interest, shall be treated to have been answered in favour of the Revenue and against the assessee.